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Venezuela has been gripped by uncertainty because of President Hugo Chávez's illness. And if you own an emerging-market bond fund, you most likely have a stake in the outcome.

By the end of last year, investors in Venezuela had a clear sense that the country was headed in a new direction. Though Chávez had won the presidency, the recurrence of his cancer caused many investors to bet that OPEC member would have a new leader sooner rather than later.

Events haven't gone as smoothly as investors might have hoped. Chavez hasn't been seen since his mid-December surgery, and now speculation that rifts have emerged among Chávez's supporters are rife, while the opposition has called for proof that Chávez is still alive and in charge. The uncertainty has caused the BofA Merrill Lynch Emerging Markets Sovereigns Venezuela USD bond index to drop 4% since Jan. 3.

ALL OF THIS COULD SEEM LIKE an amusing sideshow, except for one detail: There's a good chance you have skin in the game if you've jumped on the emerging-market-bond bandwagon. That's because Venezuela, for all its dysfunction, makes up 10% of the JPMorgan EMBI Index, one popular emerging-market, dollar-denominated bond benchmark; others have 5%. As a result, 42 of the 62 emerging-market bond funds Morningstar tracks have portfolios with a stake in Venezuela, with 27 having more than 5% of their portfolio in the country.

Owning some Venezuelan bonds may not be the end of the world. For starters, the country appears willing and able to pay its debt, says Gordian Kemen, chief Latin American fixed-income strategist at HSBC. And its 9.3% yield easily trumps the BofA Merrill Lynch Emerging Market Sovereigns U.S. Dollar bond index's 5.5% yield. "We're still overweight, and there's no reason to change," Kemen says.

But bad news hits Venezuela hard. In 2012, the price of the Venezuelan bonds lost 15% from May 3 through June 1 as investors worried about an economic slowdown in China and a euro-zone meltdown. The Merrill Lynch Emerging Markets Sovereigns (USD) bond index fell just 5.3% in the same period. If something unexpected happens in Venezuela, expect another big drop. "People have obviously pulled back," says Fran Rodilosso, portfolio manager for Market Vectors ETFs. "But if large holders decide to get out, there will be more damage than this."

As a result of Venezuela's volatility, some managers view it as a trading vehicle, to be bought when fears bring prices down and sold when the market gets too complacent. That's the view of James Craige, head of the emerging-markets team at asset-manager Stone Harbor Investment Partners. "We're not married to Venezuela," he says. "We're just dating it."

Others take a longer-term view. For instance, the
Fidelity New Markets Income
Fund (ticker: FNMIX) had 15% of its portfolio in Venezuela—50% more than the benchmark. But John Carlson, the fund's manager, says he balances the risks by reducing his stake in other volatile countries, and increasing his positions in more stable ones. As a result, his fund has had a "standard deviation"—a measure of a fund's volatility—of just 6.8% during the past three years, according to Morningstar, more than two percentage points less than the average emerging-market bond fund. "It may seem like a large bet," Carlson says. "But I'm cognizant of that and I'm working to reduce the volatility."